3 Biotech Stocks With Astonishingly Low P/E Ratios

Background

The NASDAQ Biotech ETF (IBB) jumped 68% between December 2013 and July 2015.

– Rising demand tied to an older, increasingly insured U.S. population.

– Technological advances leading to costly new medicine.

However, the IBB has dropped 19.5% since July.

– Payer pushback to unchecked drug price increases.

– Worry over regulatory price curbs.

Background continued…

Biotech stocks are high risk/high reward stocks.

– Drugs are expensive to develop and 90% of drug trials fail.

– If successful, drugs can produce very high gross margins.

Investors typically pay a high valuation/price to earnings (P/E) ratio for this potential reward.

Background continued…

Yet, the following three stocks trade at P/E ratios below 10.

No. 1: AMAG Pharmaceuticals (NASDAQ: AMAG)No. 2: Mallinckrodt Plc. (NYSE: MNK)No. 3: Gilead Sciences (NASDAQ: GILD)

No. 1: AMAG Pharmaceuticals– Total second-quarter revenue of $123.9 million.

• Includes second-quarter net product sales of $84.7.

• Makena sales of $63.6 million.

• Only FDA approved therapy to reduce risk of recurrent pre-term birth in certain at-risk women.

• Acquired in November 2014.

• Sales up 58% year over year.

• Feraheme sales of $20.6 million.

• Used to treat iron deficiency in chronic kidney disease patients.

• Sales down 8% year over year.

AMAG Pharmaceuticals continued…

– Total second-quarter non-GAAP net income of $44.8 million.

• Second-quarter diluted non-GAAP EPS of $1.12.

• Up from diluted non-GAAP EPS of $0.03.

• Guiding for cash earnings of $180 million+ in 2015.

• Analysts estimate EPS of $5.24 in 2015.

• And they expect EPS of $7.68 in 2016.

AMAG Pharmaceuticals continued…

And that means that AMAG is trading at just five times forward EPS.

No. 2: Mallinckrodt Plc.– Total fiscal third-quarter revenue of $965 million.

• Up 47.8% year over year.

• Includes August 2014 acquisition of Acthar Gel.

– Acthar Gel fiscal Q3 sales of $268.7 million.

• Includes April 2015 acquisition of Inomax.

– Inomax fiscal Q3 sales of $81.5 million.

• Significant sales from Ofirmev and specialty drug/opioid franchise.

– Ofirmev fiscal Q3 sales of $62.1 million.

– Specialty drug/opioid fiscal Q3 revenue of $307.9 million.

Mallinckrodt Plc. continued…

– Total fiscal third-quarter net income of $249.5 million.

• Fiscal third-quarter diluted non-GAAP EPS of $2.05.

• Up 70.8% from a year ago.

• Guiding for FY2016 adjusted EPS of $7.70 to $8.20.

Mallinckrodt Plc. continued…

• And that means that Mallinckrodt is trading at just 8.6 times forward EPS.

No. 3: Gilead Sciences– Total second-quarter revenue of $8.24 billion.

• Up 26.2% year over year.

• Hepatitis C drug revenue (Sovaldi + Harvoni) of $4.9 billion.

• HIV drug sales of $2.7 billion.

– Five HIV therapies on pace to eclipse $1 billion in annualized sales.

• Other drug revenue of $495 million.

– Includes half a billion dollar annualized sales run rate for both Letairis and Ranexa.

Gilead Sciences continued…

– Total second-quarter net income of $4.8 billion.

• Second-quarter diluted non-GAAP EPS of $3.15.

• Up 33.5% from a year ago.

• Analysts expect EPS of $11.61 and $11.52 in 2015 and 2016, respectively.

Gilead Sciences continued…• And that means that Gilead Sciences is trading at just 8.75 times

forward EPS.

Tying it together• Stocks often trade at low P/E ratios when risk creates

uncertainty.• Drug price risk is a concern for all three companies.• Competitive threats could keep valuations depressed.• No one knows where any of these stocks may be

heading.• If stocks follow earnings over time and worry over

price pushback diminishes, then these low P/E stocks may be worth investigating.

The next billion-dollar iSecret.